Kemet lands first acquisition, shifts production focus to China

Reversing a longheld tradition, Kemet Corp. last week made its first-ever acquisition and unveiled a comprehensive reorganization plan that addresses the company's need for proprietary products and a global manufacturing footprint.

Kemet said it bought certain product lines from Greatbatch-Sierra Inc. and set up a new business unit called Kemet Innovation Center to accelerate its development of higher-margin products. The company will also cut 650 manufacturing jobs in the United States over the next two years and relocate the production of commodity items to China and Mexico.

In two years Kemet expects half of its components will be made in China; the company currently has no manufacturing presence in the country.

The shift is in response to EMS providers relocating facilities to the Asia-Pacific region, according to a spokesman. Today, Kemet makes 80% of its products in Mexico and 20% in the United States. Mexico's share will fall by 2005 to about 50% while in the United States only product development will be carried out, the spokesman said.

"The last several years have seen profound changes in the competitive landscape of the electronics industry," said Jeffrey Graves, president and chief executive of Kemet, Greenville, S.C., in a statement. "We have listened closely to our customers describe their future directions, and we are aligning Kemet's future plans closely with them."

Analysts said Graves, a former General Electric executive who joined Kemet three years ago, is pushing for the company to both see itself as a global player and also expand its portfolio to include parts that are less price-sensitive.

"It's very difficult to make a profit selling commodity items," said David MacGregor, an analyst at Longbow Research, Cleveland. "They need to develop proprietary products."

In the last year, Kemet has suffered price erosion of about 5% per quarter, according to MacGregor. By creating the Innovation Center, Kemet hopes to limit the impact of commodity items on its margins while boosting itself globally through acquisitions, starting with the Greatbatch purchase.

"Greatbatch is a relatively small deal and unlikely to impact the company's bottom line, but they made all the due diligence you would do with a bigger acquisition," MacGregor said. "A small deal is the way to go for a company that's not used to acquisitions."

The latest reorganization will result in charges of $35 million over the next two years. Kemet will also take a $15 million asset impairment charge but expects to recoup the losses within one year and garner between $50 million and $60 million in savings by March 2006.